Natalia Gurushina, Economist, Emerging Markets Fixed Income
June 21, 2019
Frontloading support for South Africa’s state-owned companies may push the 2019-2020 fiscal gap beyond 5% of gross domestic product (GDP). Central European industrial activity has yet to feel the impact of the eurozone’s manufacturing contraction, supporting neutral policy bias in countries like Poland.
There was a whiff of disappointment in South Africa as the state of the nation address provided no clarity about the government's plan for the energy giant, Eskom—other than saying that a “significant portion” of ZAR230B (budgeted over 10 years) will be brought forward. One big question, of course, is what kind of impact this will have on the state budget, which is already under stress due to weak economic growth. Estimates suggest that frontloading the Eskom package may add 0.5-0.6% of GDP to headline fiscal deficit, potentially pushing it above 5% of GDP in 2019-2020. These concerns reduced the positive impact of other parts of the address, such as spectrum licensing, reaffirming the central bank’s mandate, improving the business climate, and reducing corruption.
Activity indicators in Central Europe continue to defy gravity (manufacturing contraction in the eurozone, which is the region’s main trade partner). Poland’s industrial production surprised to the upside in May, expanding by 7.7% on a yearly basis. Minutes of the Monetary Policy Committee released this morning suggest that 2019 economic growth may exceed earlier projections—and today’s data support these expectations. The report also reaffirmed the central bank’s neutral policy bias—but also revealed deeper divisions about the medium-term outlook, especially as regards the impact of global factors on Poland’s economy.
The below-consensus Markit Purchasing Managers Indices (PMIs) in the U.S. provided additional justification for the Federal Reserve’s dovish policy bias. Both manufacturing and services surveys were weaker than expected in May, with the former barely staying in expansion territory (i.e. above the 50.0 threshold—see chart below). The U.S. manufacturing PMIs continue to look stronger than their eurozone peers, which remained deep in the contraction zone in May. Still, today’s releases were in line with the global slowdown narrative, reinforcing expectations of further policy easing in the coming months (including a 22% implied probability of a larger 50bps Federal Reserve rate cut in July).
Chart at a Glance
Source: Bloomberg LP
IMPORTANT DEFINITIONS & DISCLOSURES
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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